After two major balance sheet restructurings, Hudson City Bancorp still needs to change its business model, possibly restructure again and more than one analyst thinks the company should consider selling.
Sterne Agee analyst Matthew Kelley on Friday projected that in a takeout scenario, the troubled Hudson City Bancorp would have a “terminal value” of $8.25 a share, which would be a 31 percent premium over Thursday’s closing price of $6.27.
Hudson City’s net interest margin — the difference between a bank’s average yield on loans and investments and its average cost for deposits and wholesale borrowings — has been under pressure for several years, in the prolonged low-rate environment, because of the Paramus, N.J., lender’s focus on residential mortgage lending.
Following a first-quarter 2012 balance sheet restructuring that was forced by regulators and included the prepayment of $12.5 billion in higher-cost borrowings charges of $649.3 million, the company prepaid another $4.3 billion in borrowings during the fourth quarter, resulting in $440.7 million in charges.
During the first quarter, Hudson City earned $73 million, or 15 cents a share, and the net interest margin improved to 2.15 percent from 1.73 percent the previous quarter, and 1.72 percent a year earlier. For the entire U.S. banking industry, the first-quarter net interest margin was 3.52 percent during the first quarter, narrowing from 3.57 percent in the fourth quarter, and 3.66 percent in the first quarter of 2011, according to the Federal Deposit Insurance Corp.
Kelly said that “earnings power at (Hudson City) will continue to suffer in a sustained low interest rate environment, in our view,” and that the company was “expected to announce changes to its business plan (add mortgage banking),“ and that a third restructuring of borrowings was “not out of the question.”
The analyst said that mortgage loan prepayments were continuing to pressure Hudson City’s margins, and that because Fannie Mae and Freddie Mac have raised their dollar limits on the “conforming” mortgage loans that they will buy, “the pool of jumbo mortgages which has wider spreads (without government guarantees),” and has been a traditional focus for the company, “is smaller.”
Going forward, options for Hudson City “include a push into a less capital-intensive mortgage banking,” focusing on quickly selling newly originated conforming mortgages to generate gains-on-sale,” according to Kelley, who added that the company “may also be considering a move into non-residential lending (multifamily and commercial real estate),” with which Sterne Agee “would be more concerned,” because of “the lack of infrastructure, history, and expertise in these areas.”
Regarding the possibility of a sale, Kelley said he would be “surprised to see the company sell over the near term,” because of “the company’s large size, [a] current regulatory order, and plans to announce new revenue/asset classes,” but added that he saw “upside in a potential sale,” for an acquirer “that could take the substantial liability marks.”
Back in January, Guggenheim Securities analyst David Darst suggested that New York Community Bancorp could be a potential bidder for Hudson City Bancorp, as the combined companies “would create an attractive (New York, New Jersey, and Connecticut) franchise with 345 branches in the tri-state market,” and that New York Community “could pay $8 to $8.50 per share,” representing about 1.3 times tangible book value “in an all-stock transaction,” with “(New York Community) realizing greater than 20 percent (earnings per share) accretion.”
—By TheStreet.com’s Philip van Doorn
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